Net investment income tax state and local tax deduction

Technical topics regarding tax preparation.
#21
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And Section 63 is part of Chapter 1, while NIIT is part of Chapter 2A -- totally separate for this purpose.


Not really separate when there’s a direct cross-reference…But if it really is totally separate, that would mean that in prior years, your NIIT-allocable SALT deduction would have been $0, you know, because it’s separate.

it's worth noting that in the first few pages, several nationally-known Democratic politicians show up because they have released copies of their tax returns for public review.


It’s also worth noting that many people probably don’t care.
Well, the full amount of state tax was properly deducted


Right. And the old lady properly deducted her medical expenses, even though they added up to 3% of her AGI.
 

#22
makbo  
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UltraTax may be releasing an update which changes how they treat this.

For those to whom the SALT limit applied to NIIT is crystal clear from the law or regs, do we allocate the state tax first, then apply the $10K SALT limit, or do we first apply the SALT limit, and then allocate?

Jeff-Ohio wrote:It’s also worth noting that many people probably don’t care.

But you cared enough to comment on it.
 

#23
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But you cared enough to comment on it.


Whether or not someone comments isn’t necessarily reflective of their care or lack of it, since care is a feeling and isn’t always manifested in the verbal or written word. Conversely, not caring might actually be manifested verbally or in writing. So, when someone writes something or says something, you don’t really know if they care or not. If someone says they don’t care, the mere fact that they said they don’t care doesn’t necessarily mean they care, especially if their comments surround the probabilities of others caring.
 

#24
WEISSEA  
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When I force itemized deduction,"

Agree, only way Proseries allows State income tax against NIIT on 8960 is to to force itemize which it won't let me do( has box but box does not work). Do other tax sw allow forced itemize if std is larger?
 

#25
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So Proseries previously did allow state & local taxes in excess of $10,000 in computing NII, but now it does not allow it? I got this notice?
1040 Individual - Form 8960 SALT Limit

Use this query to identity the individual tax clients that didn't have the state and local income taxes limited on Form 8960, Net Investment Income Tax, line 9b. This erroneously decreased net investment income and would understate the net investment income tax if the modified adjusted gross income threshold on line 15 was not used. The issue was fixed in version 2018.230.
 

#26
Wiles  
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Too bad they fixed that
 

#27
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"For those to whom the SALT limit applied to NIIT is crystal clear from the law or regs, do we allocate the state tax first, then apply the $10K SALT limit, or do we first apply the SALT limit, and then allocate?"

So, for example, suppose my state tax deduction is $40K, and real property tax is $10K, total $50K which is limited to $10K under Temporary Cut and Jobs Act (TJCA). Now, my software calculates that state tax is 80% of the total, therefore it applies 80% to the $10K limit, then it applies the NII state income tax deduction percent (to $8,000). Yet, I paid $40K of state income tax against the total taxable income used for NII allocation. Why don't I get to use $10K if my state income tax was at least that amount? Can anyone point me to code or regs that explain this treatment?

Apparently, these vendors are just tossing out some formulas where the IRS has not taken a position, and in their own self-interest, they are taking the most conservative position. I know UT switched its calculation mid-season for no particular reason that I could see.
 

#28
Wiles  
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Could we say that usage of the $10K is fungible?
 

#29
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What you’re deducting is up to you. IMO. If you don’t put real estate taxes in the software then you’ll get the result you want. I guess the software is concluding that you intend to deduct prorata RE and income taxes.
 

#30
Chay  
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If I determine my deduction for state taxes on Form 8960 as though the full $10,000 is income taxes, does that bind me to the same position on my state tax return?
 

#31
Nilodop  
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Wouldn't that depend on state law?
 

#32
Chay  
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Yes, but for most states, when you look at the law, you see they're just punting it back up to the federal level by explicitly defining every term to have the same meaning as it does in the Internal Revenue Code except where otherwise noted. Then when you itemize you have to exclude income taxes "deducted" on your federal return, and "deducted" isn't given any special meaning.
 

#33
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Terry Oraha wrote: If you don’t put real estate taxes in the software then you’ll get the result you want. I guess the software is concluding that you intend to deduct prorata RE and income taxes.

The result I want is to conclude that deductions under NIIT, which is a different code chapter (2A) from regular tax, are not affected by TCJA changes to Chapter 1. If it's so crystal clear, why didn't the IRS simply add an instruction to Form 8960 that the state tax deduction line cannot exceed $10,000?

For one of my clients, where the extra tax bill was about $1,200 if you applied the SALT limit to NIIT, I filed the return before my software vendor changed their calculation to the more conservative position (I informed client of the potential issue). I guess we'll find out in the next year or two if the IRS cares. Plus, even if they do, we'll just file an amended return and claim instead the QBID for rental income that client didn't claim on original return, canceling out the difference. ;)
 

#34
Chay  
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makbo wrote:The result I want is to conclude that deductions under NIIT, which is a different code chapter (2A) from regular tax, are not affected by TCJA changes to Chapter 1.


That would be nice, but how do you overcome the following?

- Section 1411(c)(1)(B) provides that net investment income is computed after subtracting "the deductions allowed by this subtitle which are properly allocable to such gross income or net gain."

- Section 164(a)(3) provides that "State and local, and foreign, income, war profits, and excess profits taxes" are "allowed as a deduction for the taxable year within which paid or accrued"

- Section 164(b)(6)(B) provides that "the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return)."

Taking these three points together, I conclude the following:

1. In order to be deductible against investment income for purposes of the NIIT, a deduction must be allowed by subtitle A.
2. In order to be a deduction allowed by subtitle A, a state income tax must be taken into account under paragraph (3) of section 164.
3. In order to be taken into account under paragraph (3) of section 164, a state income tax must not cause the aggregate of the state and local taxes taken into account under section 164 to exceed $10,000 ($5,000 in the case of a married individual filing a separate return).
 

#35
EZTAX  
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Any clarity on this subject in the last year since this was discussed?

Ultra-tax is often allowing no State tax deduction against NIIT and I cannot find a worksheet showing a calculation. Nor did tech support have a clue. Luckily not much money involved but this is really bugging me. On one client we put a number in the forced input but it would not populate the form. In another it would. For us this is an "after 7/15" problem but it is a bother.
 

#36
Chay  
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In the prior discussion, both Jeff-Ohio and I provided arguments with statutory citations as to why the $10,000 limit does apply to state and local taxes deducted for purposes of the NIIT. The only counterargument was in #18, but that didn't go anywhere. How much more clarity do you need?
 

#37
EZTAX  
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Not disagreeing with the Salt limit but wondering about the allocation. Ultra-tax seems to be pro-rating based on total state tax and tax attributable to NIIT. Wondering about the argument that this is not correct and can take all applicable state tax up to 10k limit. Maybe a dumb question but i am really trying to understand the dynamics of this form.

Thanks.
 

#38
Chay  
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I've been thinking about this off and on, and I'm leaning towards applying the $10,000 limit after doing the pro-rata investment income allocation on the entire amount of income taxes paid regardless of the limit. The worksheet on page 15 of the instructions to Form 8960 seems to take this approach when applying the section 67 (2% of AGI) limitation. For most taxpayers, this would mean there is effectively no limit for purposes of the NIIT.
 

#39
Wiles  
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In the absence of any guidance, this seems a reasonable approach.
 

#40
Wiles  
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For most taxpayers, this would mean there is effectively no limit for purposes of the NIIT.

I have looked at a few of mine. Lacerte is doing it the way you suggest. For many of my clients, they are still hitting the $10K limit on their Form 8960. And quite a few don't itemize, so they are getting no deduction.
 

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